PRESENTATION ON TOBACCO INDUSTRYPRESENTATION ON TOBACCO INDUSTRY

SRK TOBACCO PVT. LTD. SRK TOBACCO PVT. LTD.

AMITY INTERNATIONAL BUSINESS SCHOOL

History of TobaccoHistory of Tobacco

Tobacco cultivation has a history of about 8000 years.

Europeans introduced to tobacco when Columbus landed in America in 1492.

Portuguese traders introduced tobacco in India during 1600. Tobacco became a valuable commodity in barter trade and its use spread rapidly.

Gradually tobacco got assimilated into the cultural rituals and social fabric due to presumed medicinal and actually addictive properties attributed to it.

Approximately 7 million tons of tobacco is produced globally each year.

Approximately one-third of the total annual production is exported.

Tobacco is the seventh largest cash crop of the 50 states in the US.

Asia leads the global industry with 2/3 of the world’s total production, Asia leads the global industry with 2/3 of the world’s total production, with the U.S. making up the majority of the worlds remaining production with the U.S. making up the majority of the worlds remaining production making them a global leader behind Chinamaking them a global leader behind China

Tobacco is the most heavily taxed of any consumer product by percent of retail price.

Nearly 70% of world tobacco is produced in the following six countries: China (4,904 mil. lbs.), India (1,312 mil. lbs.), Brazil (1,137 mil. lbs.), United States (801 mil. lbs.), Indonesia(319 mil. lbs.), and Turkey (313 mil. lbs.).

Types of tobacco use in India

Smoked forms of tobacco use Bidis, Cigarettes, Cigars, Cheroots, Dhumti,

Pipe, Hooklis, Chillum, Hookah.

Smokeless forms of tobacco use Paan (betel quid) with tobacco, Paan masala

with tobacco

Tobacco, areca nut and slaked lime preparations, Mainpuri tobacco, Mawa, Khaini, chewing tobacco, snus, gutkha

- Tobacco products for application: Mishri, Gul, Bajjar, Lal dantmanjan, Gudhaku, Creamy snuff, Tobacco water, Nicotine chewing gum.

Roles of the major player in the Roles of the major player in the marketmarket

USDA-ASCS, United States Department of Agriculture, Agricultural Stabilization and Conservation Service

Federal Crop Insurance Corporation (FCIC)

Stabilization Cooperative (Co-op)

Grower, the farmer who grows and cures tobacco

Warehouse, the place where the farmers' tobacco is usually sold at auction.

Dealer, an individual who acts as a speculator by buying and reselling tobacco Processor

Manufacturer

International trade scenario of International trade scenario of tobaccotobacco

Production

Consumption

Exports

Imports

Top Tobacco Producing Nations (2005)

1.China ... 2.64 million tonnes (39.6% of world total 6.7 million tonnes)2.India ... 0.64 million tonnes (9.6%)3.Brazil ... 0.55 million tonnes (8.3%)4.United States ...0.47 million tonnes (7%)5.European Union ... 0.31 million tonnes (4.6%)6.Turkey ... 0.23 million tonnes (3.5%)7.Zimbabwe ... 0.22 million tonnes (3.3%)8.Indonesia ... 0.14 million tonnes (2.2%)9.Malawi ... 0.12 million tonnes (1.8%)10.Russia ... 0.09 million tonnes (1.4%)

Developing nations generated about 79% of global tobacco production in 2000. According to the FAO, developing countries will account for 87% of world tobacco by 2010. China is projected to remain the world's largest tobacco producer.

ProductionProduction

ConsumptionConsumption

Top Tobacco Consuming Nations (2005)Top Tobacco Consuming Nations (2005)

1.China ... 2.66 million tonnes (38% of world total 7 million tonnes)1.China ... 2.66 million tonnes (38% of world total 7 million tonnes)2.European Union ... 0.71 million tonnes (10.2%)2.European Union ... 0.71 million tonnes (10.2%)3.India ... 0.52 million tonnes (7.4%)3.India ... 0.52 million tonnes (7.4%)4.Russia ... 0.44 million tonnes (6.4%)4.Russia ... 0.44 million tonnes (6.4%)5.United States ... 0.43 million tonnes (6.2%)5.United States ... 0.43 million tonnes (6.2%)6.Brazil ... 0.23 million tonnes (3.3%)6.Brazil ... 0.23 million tonnes (3.3%)7.Japan ... 0.18 million tonnes (2.6%)7.Japan ... 0.18 million tonnes (2.6%)8.Indonesia ... 0.17 million tonnes (2.4%)8.Indonesia ... 0.17 million tonnes (2.4%)9.Turkey ... 0.14 million tonnes (2%)9.Turkey ... 0.14 million tonnes (2%)10.Pakistan ... 0.10 million tonnes (1.4%)10.Pakistan ... 0.10 million tonnes (1.4%)

ExportsExports

World tobacco leaf exports from 1998-2000 averaged World tobacco leaf exports from 1998-2000 averaged 1.98 million tonnes per year which the FAO expects 1.98 million tonnes per year which the FAO expects to grow by 1% to 2.2 million by 2010.to grow by 1% to 2.2 million by 2010.

Today developing nations are responsible for almost Today developing nations are responsible for almost 65% of global tobacco exports, while developed 65% of global tobacco exports, while developed countries account for the remainder. Of the countries account for the remainder. Of the countries below, the domestic economies of countries below, the domestic economies of Zimbabwe and Malawi depend most heavily on Zimbabwe and Malawi depend most heavily on tobacco exports to the rest of the world.tobacco exports to the rest of the world.

Top Tobacco Leaf Exporting NationsTop Tobacco Leaf Exporting Nations

1.European Union ... 18.1% of world total1.European Union ... 18.1% of world total2.Brazil ... 16.6%2.Brazil ... 16.6%3.United States ... 9.9%3.United States ... 9.9%4.Zimbabwe ... 9.1%4.Zimbabwe ... 9.1%5.Turkey ... 6.5%5.Turkey ... 6.5%6.China ... 5.6%6.China ... 5.6%7.India ... 5.5%7.India ... 5.5%8.Malawi ... 5.3%8.Malawi ... 5.3%9.Russia ... 3.9%9.Russia ... 3.9%10.Other European countries ... 2.0%10.Other European countries ... 2.0%

Because cigarette manufacturers have developed new processing Because cigarette manufacturers have developed new processing technologies that use lower-quality tobacco leaves, developing technologies that use lower-quality tobacco leaves, developing countries are more competitive and can increase their shares of the countries are more competitive and can increase their shares of the world tobacco market. Regardless of superior tobacco quality, higher world tobacco market. Regardless of superior tobacco quality, higher production costs mean that tobacco exports from developed countries production costs mean that tobacco exports from developed countries like the U.S. cost twice as much as tobacco shipped from developing like the U.S. cost twice as much as tobacco shipped from developing nationsnations..

ImportsImports

IMPORTSIMPORTS 19921992 19941994 19961996 19981998

WORLD TOTALWORLD TOTAL 19491481949148 19229391922939 19078461907846 20113412011341

RUSSIAN RUSSIAN FEDERATIONFEDERATION

148000148000 184900184900 200900200900 264670264670

GERMANYGERMANY 235855235855 222080222080 222591222591 260510260510

UNITED STATESUNITED STATES 326454326454 306838306838 246762246762 241065241065

UNITED UNITED KINGDOMKINGDOM

166027166027 157689157689 149756149756 137183137183

JAPANJAPAN 8563485634 9046990469 101442101442 9892098920

NETHERLANDSNETHERLANDS 9736897368 105358105358 8481384813 8486084860

INDIAN ASPECTINDIAN ASPECT

Indian trade scenario of tobaccoIndian trade scenario of tobacco

Tobacco occupies a prime place in the Indian economy on account of its considerable contribution to the agricultural, industrial and export sectors.

India is the third largest producer and eighth largest exporter of tobacco and tobacco product in the world

In 2000-2001, the contribution of tobacco to the Indian economy was to the extent of Rs 81.820 million, which accounted for about 12% of the total excise collections.

India’s share in the world tobacco production was 10.2% in 2000.

While India's share in the world's area under tobacco crop has risen from 9% to 11% in the last 3 decades, its share in production has inched up from 9% to 10%.

Of the 200 million tobacco consumers in India, only 13% consume it in the form of cigarettes, while 54% consume it in the form of beedi and the rest in raw/gutka forms.

India is the only country where the bulk of production consists of numerous non-smoking types of tobacco. The presence of a strong domestic demand for beedi,hookah, chewing and snuff tobacco necessitates the cultivation of non-cigarette types of tobacco to a relatively large extent.

Production Trend in IndiaProduction Trend in India

Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Bihar and Tamil Nadu are the major tobacco producing states in India.

Around 65% of India’s production comes from Andhra Pradesh (34%),Gujarat (22%) and Karnataka (11%).

Tobacco being a labour intensive crop provides employment to more than 60 lakhs people who are engaged in the farming curing, redrying, packaging, grading, manufacturing distribution, export and retailing activities. The bidi industry which provides employment to around 44.00 lakhs essentially unskilled rural folks mostly women is also arresting the influx of rural labour to urban centres. 

Consumption Trend in IndiaConsumption Trend in India

India is one of the biggest tobacco markets in the world, ranking forth in total tobacco consumption behind only the markets of China and the United States.

However, the per capita consumption in the country is 0.9 kg compared to the world average of 1.8 kg.

Tobacco usage in India is contrary to world trends since chewing tobacco and beedi are the dominant forms of tobacco consumption, whereas internationally, cigarette is the dominant form of tobacco use.

The use of tobacco and its various products appears to have declined in the rural and urban populations of India over the period from 1987- 1988 to 1999-.2000. This trend in decline in consumption is faster among the urban population.

India’s ExportIndia’s ExportCurrently, Indian tobacco is exported to more than 80 countries spread over all the continents. 

Tobacco economy in the post-Independence period

From 1951 to 2001, there was an increase in the production by 130%, in exciserevenue By 31,614%, in export revenue by 5823% and in consumption by 92%

•Tobacco has been a traditional export item for India. However, the share of tobacco exports in India's total exports witnessed a declining trend from 1974-1975(2.5%) to 2002-2003(0.4%).

•The declining share of tobacco exports to total exports is basically due to the sharp fall in the export share of unmanufactured tobacco.

•The rise in the popularity of cigarettes opened the market for Indian tobacco in the UK, Japan, the USSR, Egypt, Italy, China and Bulgaria.

•According to data available in 2001,Russia (27%), the UK (10%), Yemen (9%),Germany (8%), the Netherlands (6%) and Belgium (5%) are the major markets for Indian unmanufactured tobacco.

•Russia, Belgium, Germany, Nepal and Singapore are the major importers of tobacco from India.

• Due to the global increase in tobacco prices, India's export earnings have gone up by over 58 times from Rs 152 million in the beginning of the 1950s to Rs 8834 million.

In spite of India having a comparative advantage over leading tobacco producing countries in terms of low cost of production, farm price and conversion cost, it has not emerged as a leading exporter.

This is mainly due to low productivity and quality as compared to Zimbabwe, Brazil, the USA, etc.

Though India has explored new markets, its share in the world market has declined.

MARKET SHAREMARKET SHAREITC is the leading companies in the Indian tobacco ITC is the leading companies in the Indian tobacco market, holding a 72% share of the market's volume. market, holding a 72% share of the market's volume. Godfrey Philips accounts for a further 12% of the Godfrey Philips accounts for a further 12% of the

market's volume.market's volume.

Market VolumeMarket Volume

The Indian tobacco market grew by 1.1% in 2006 to The Indian tobacco market grew by 1.1% in 2006 to reach a volume of 99.1 billion sticks. The compound reach a volume of 99.1 billion sticks. The compound annual growth rate of the market volume in the period annual growth rate of the market volume in the period 2002-2006 was 2.6%. 2002-2006 was 2.6%.

•Assets such as experienced farming community confers a significant competitive advantage for India.

•With an increase in the world import requirements translating in to a rise in export potential, Indian Tobacco industry is presented with significant opportunities to consolidate and extent its position in the global market.

Indian government policies and Indian government policies and institution for promotion of trade institution for promotion of trade

for the tobacco industry for the tobacco industry

IntroductionIntroduction

Government intervention influences the production and Government intervention influences the production and trade of most of the world's unmanufactured tobacco.trade of most of the world's unmanufactured tobacco.

In some nations, government intervention is pervasive In some nations, government intervention is pervasive and weighs heavily in most production and trade and weighs heavily in most production and trade decisions. High levels of intervention often involve decisions. High levels of intervention often involve domestic subsidies, trade barriers, legal restrictions, or domestic subsidies, trade barriers, legal restrictions, or agricultural production and export taxes.agricultural production and export taxes.

In contrast, government intervention in some nations is In contrast, government intervention in some nations is minimal and has little or no influence on tobacco minimal and has little or no influence on tobacco producers and traders. producers and traders.

Government interventions in support of the Government interventions in support of the industry can broadly be classified into:industry can broadly be classified into:

(i) Institutional and regulatory support;(i) Institutional and regulatory support;(ii) Price and market support;(ii) Price and market support;(iii) Export promotion;(iii) Export promotion;(iv) Research and development (R&D); (iv) Research and development (R&D); andand(v) Direct fertilizer and credit subsidies.(v) Direct fertilizer and credit subsidies.

In India, direct intervention was provided through In India, direct intervention was provided through Government-controlled tobacco trade, domestic Government-controlled tobacco trade, domestic price supports, and minimum export prices price supports, and minimum export prices through a state trading corporation known as the through a state trading corporation known as the Tobacco Board.Tobacco Board.

Provides training to farmers, study tours, on farm Provides training to farmers, study tours, on farm trials, Integrated post management, Integrated trials, Integrated post management, Integrated nutrient management , energy conservation and nutrient management , energy conservation and post harvest product hygiene to insure product post harvest product hygiene to insure product integrity.integrity.

Tobacco BoardTobacco Board

Model Project Area schemeModel Project Area scheme To develop market oriented production base through good To develop market oriented production base through good

agricultural practices.agricultural practices.

Tobacco Quality CirclesTobacco Quality Circles

Concept adopted from improvement of yields and enhancement of Concept adopted from improvement of yields and enhancement of quality of tobacco with involvement of front line farmers.quality of tobacco with involvement of front line farmers.

Tray SeedlingsTray Seedlings

Seedlings are grown in soil free plant based medium which will Seedlings are grown in soil free plant based medium which will prevent soil borne diseases.prevent soil borne diseases.

Central Tobacco Research InstituteCentral Tobacco Research Institute

Organization of Indian council of Organization of Indian council of AgricultureAgriculture

Located in Rajahmundry district in Located in Rajahmundry district in southern state of Andhra Pradesh.southern state of Andhra Pradesh.

Objectives include high yielding cultivars Objectives include high yielding cultivars of tobacco, quality up gradation thereby of tobacco, quality up gradation thereby improving farmers economies and tobacco improving farmers economies and tobacco exports.exports.

VISHESH KRISHI AND GRAM UDYOG YOJANAVISHESH KRISHI AND GRAM UDYOG YOJANA(VKGUY)(VKGUY)

Objective of VKGUY is to promote exports of :Objective of VKGUY is to promote exports of :

(i) Agricultural Produce and their value added (i) Agricultural Produce and their value added products;products;

(ii) Minor Forest Produce and their value added(ii) Minor Forest Produce and their value added variants;variants;(iii) Gram Udyog Products;(iii) Gram Udyog Products;(iv) Forest Based Products; and(iv) Forest Based Products; and(v) Other Products, as notified from time to time.(v) Other Products, as notified from time to time.

AEZ-Agri Export ZoneAEZ-Agri Export Zone

Promoting greater exports of fresh and Promoting greater exports of fresh and processed agricultural produce from the processed agricultural produce from the country.country.

All aspects of agriculture such as All aspects of agriculture such as production, research, development, production, research, development, extension, post harvest management and extension, post harvest management and marketing are addressed in a focused marketing are addressed in a focused manner for successful implementation manner for successful implementation

International trade agreementsInternational trade agreements

Potential to interfere with and undermine sound tobacco Potential to interfere with and undermine sound tobacco control policy measures, including:control policy measures, including:

Warning labelsWarning labelsIngredient disclosure requirementsIngredient disclosure requirementsBans on misleading descriptors ("light," "mild," "low")Bans on misleading descriptors ("light," "mild," "low")Tobacco tariff and tax policyTobacco tariff and tax policyCigarette content regulationCigarette content regulationAdvertising and marketing restrictionsAdvertising and marketing restrictionsClean indoor air rulesClean indoor air rulesRestrictions on retail distribution networks for tobacco Restrictions on retail distribution networks for tobacco productsproducts

Multilateral treaties

WTO multilateral agreements

Trade in all tobacco, raw or manufactured, is regulated primarily under the agreements in Annex 1A to the Marrakesh AgreementThe WTO multilateral agreements significantly expanded global trade in tobacco products by mandating sizable reductions in tariff and non-tariff barriers to trade in tobacco products

The new WTO regime has led to the elimination of legislation that required that all cigarettes produced in the United States contain at least 75% domestically grown tobacco.It has also led to the elimination of or reduction in tariff and non-tariff barriers to trade in tobacco and tobacco products in numerous other countries.

NAFTA

Created the opportunity for significantly increased tobacco trade in North America.

NAFTA is a comprehensive trade agreement that calls for dramatic market opening through the elimination of all tariff and non-tariff barriers to trade between Canada, Mexico, and the United States.

The agreement has significant implications for the United States and its tobacco trade in the region.\

European Union

EU has addressed the production and use of tobacco within the European Community.

The EU has heavily subsidized tobacco products pursuant to its Common Agricultural Policy, promoting the sale of tobacco at ‘giveaway’ prices in Northern Africa and Eastern Europe.

One example of these initiatives is the recently adopted directive that requires all EU member states to ban almost all tobacco advertising by 2006

SWOT ANALYSISSWOT ANALYSIS

STRENGTHSTRENGTH

TechnologyTechnologyResources availabilityResources availabilitySocial trendsSocial trendsEconomic trendsEconomic trendsCustomer needsCustomer needs

WEAKNESSESWEAKNESSES

Tobacco smugglingTobacco smugglingTobacco related diseasesTobacco related diseasesWasted wealth and resources and labourWasted wealth and resources and labour

OPPURTUNITIESOPPURTUNITIES

High quality productsHigh quality products

Focus on new regulationsFocus on new regulations

EmploymentEmployment

THREATSTHREATS

LitigationLitigation

Government sanctionsGovernment sanctions

dwindling market dwindling market

CONCLUSIONCONCLUSION

Growth of industry in developing countriesGrowth of industry in developing countries

Tobacco companies should take their Tobacco companies should take their responsibility as market leaders seriously responsibility as market leaders seriously

QUERIES?QUERIES?